Valuation Flashcards
Can you briefly explain the DRC method?
Method of last resort and there usually no market evidence for that asset class.
Tends to be used when the property is not traded on the open market. Usually for insurance or rating purposes. Used for owner occupied property.
Types of properties include; Ancient monument, dilapidated castle, sewage works, church, lighthouse.
Methodology:
Value of land in its existing use (assume planning permission exists)
Add current cost of replacing the building plus fees less a discount for depreciation and deterioration.
Value of land in existing use plus cost to build replacement building + fees, discounted for obsolescence/depreciation
Could you quickly explain the hierarchy of evidence?
A:* The relative weight attached to comparable evidence:
o Open market lettings
o Lease renewals
o Rent Review
o Independent expert determinations
o Arbitrator determinations
o Court determinations
o Court determinations under L and T Act 1954
o Sale and Leasebacks
o Surrender and renewals
Why are lease renewals ranked above rent reviews in the hierarchy of evidence?
Because rent reviews are usually upwards only therefore do not reflect the market. However, lease renewals more accurately reflect the market
What is the purpose of the Redbook?
To promote and support high standards in valuation delivery worldwide.
Could you just talk me through what was included within your terms of engagement?
- Property address
- Name and status of valuer
- Name of client
- Currency
- Purpose of valuation
- Basis of valuation (MR, MV)
- Valuation Date
- Agreed fee/timescale
- Details of loan if applicable
- Special Assumptions
- Format of report
- CHP
- PI cover
- Limitations of liability
- Ensure the TOE are signed
What is your firms PI cover?
That is commercially sensitive information but I can say it is between 4 and 12 million.
Where in the Redbook does it state guidance for secured lending valuations?
VPGA2 - Valuations for secured lending and dealing with COI for this and to be transparent with them.
What Redbook guidance is given in relation to secured lending valuations?
Any previous current or anticipated involvement with the borrower or the property to be valued must be DISCLOSED.
Previous involvement is defined as within the PAST 2 YEARS.
Instruction should be declined if creates a conflict. Examples include having a longstanding professional relationship with the prospective owner/borrower. When the valuer will gain a fee from introducing the transaction to the lender. When the valuer is retained to act in the disposal or letting of the completed development.
Valuers responsibility to decline or manage the conflict which must be recorded in writing in TOE and Report.
if a special assumption is made, it must be stated with and without that special assumption
Did you measure the property at Poole? If so on what basis?
A colleague measured the property on GIA basis.
How did you calculate the site density?
Building area/site coverage X 100
What is the average site coverage for an industrial unit?
40%
What statutory due diligence did you undertake for this valuation?
- EPC certificate
- Asbestos register
- Flood risk
- Planning history and policy
- Rateable value
- Title
What is defined as Market Rent?
The estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and lessee on appropriate lease terms in an arm’s length transaction, after proper marketing, where both parties had acted knowledgably, prudently and without compulsion
How did you assess the covenant strength?
Obtained a CreditSafe report, which summarised the past 3 years’ worth of audited accounts. This generates a ‘Risk Score’ based on the combination of the key financials including a company’s turnover, pre-tax profit, shareholders’ funds and credit limit.
Why did you use a SWOT analysis?
To assist with forming my opinion of suitability of the property for secured lending purposes.
What do you mean that the property was reversionary?
It was under rented and therefore on renewal of the lease the market rent would revert to the market level.
Could you just briefly talk me through your Term and Reversion method?
Term and reversion (where the market rent is more than the passing rent)
* Capitalise the remainder of the term (up until the next break, rent review, expiry/lease event). Then capitalise the reversion into perpetuity. Then add the two together
What lease terms impact value?
Lease term, rent, repair covenants, Inside/Outside the Act.
What are purchaser’s costs for a SALE?
- Agents Fees- 1%
- Legal Fees - 0.50%
- Stamp Duty -Commercial property:
o £0 -£150,000 – Nil
o £150,000-£250,000 – 2%
o Over £250,000 – 5% - The brackets are different in England, Wales and Scotland depending on government.
- VAT - 20%
What are the Stamp Duty Land Tax brackets?
- Commercial property:
o £0 -£150,000 – Nil
o £150,000-£250,000 – 2%
o Over £250,000 – 5% - The brackets are different in England, Wales and Scotland depending on government.
For the Healthcare Facility in Portsmouth what was the use class?
Class E of the Town and Country Planning (Use Classes) Order 1987, as amended.
What other purposes could you undertake a valuation for?
Insurance valuation.
What are the exceptions to a Red Book valuation?
Agency purposes, internal purposes, statutory function, expert witness evidence, negotiation or litigation
How do you ensure you are competent?
Review skills, experience, understanding and knowledge
What are the five methods of valuation? Where are these stated in the Red Book?
VPS 5
profits
residual
investment
comparative
DRC (depreciated replacement cost)
How does the profits method of valuation work?
Valuation of trade related property: turnover – costs = gross profit – reasonable working expenses + operators remuneration =
adjusted net profit capitalised at yield
How does the residual method of valuation work?
Residual method is for development sites and uses a development appraisal: Gross Development Value – fees = Net Development Value – Total Development Costs + developers’ profit = site value
Define market value?
The estimated amount for which an asset should exchange on the valuation date between a willing buyer and seller in an arms length transaction, after proper marketing, where both parties acted knowledgeably, prudently and without compulsion.
Define fair value?
The price that would be paid to buy an asset in an orderly transaction between market participants at the measurement date
When is fair value used?
If IFRS has been adopted
Define investment value?
The value of an asset to an owner, for individual investment objectives/based on their investment criteria
What is the different between an assumption and a special assumption?
An assumption is something that is reasonable for the valuer to accept as true, without the need for specific investigation, a special assumption is something that the valuer accepts as true even though it is in fact not true
What factors influence value?
Location, covenant strength, lease term, rent reviews, options to break, property condition, market condition, tenure
What is net effective rent?
Rent that takes into account all incentives
What are typical purchaser’s costs?
6.8%
What is the YP (years purchase)?
The number of years it would take for the income to repay the purchase price: 100/yield
What is the core and top slice technique?
Used for over rented properties: income flow divided horizontally with the higher yield applied to top slice to reflect the additional risk
How do you analyse a rent-free period when determining a net effective rent?
Straight line method: (total rent – incentive) / term = NER
What is mirror zoning?
A technique used for a shop with two main frontages
What is masking?
Technique used for the valuation of ‘hidden’/obscured areas
What is marriage value?
Created by the merger of interests, can be physical or tenurial, undertake before and after valuation to calculate the level of marriage value created, typically negotiated to split 50:50
When could you expect an element of hope in a valuation?
Typical example might be the future prospect of securing planning permission for the development of land or the realisation of marriage value arising in the merger of two interests in land
When can a desktop valuation be undertaken for a client?
VPS2 – ‘restricted information (desktop) valuations (no inspection undertaken)’
Can be undertaken in revaluation if the valuer is satisfied there have been not material changes to the property or location since the last valuation
How can you try to overcome a lack of investment and rental comparables?
Extend search parameters, location and time, potentially look at other asset classes but wouldn’t work for all
What is an initial yield? Compare this to a reversionary yield and true net yield?
Initial yield simple income yield for current income and current price. Reversionary yield is for properties let below the MR. MR is divided by current price on investment. Net yield is the resulting yield adjusted for purchaser’s costs.
How do you reflect risk in a valuation?
In the yield
How do you undertake a valuation for property insurance purposes?
Reinstatement valuation – use RICS Building Cost Information Service (BCIS), remember to add VAT, demolition costs, professional fees, planning and building regulation fees and inflation allowance if applicable (not Red Book compliant)
Tell me the process from start to finish of a Red Book valuation
Receive instruction, check competence, conflict of interest checks, ToE, gather information, due diligence, inspect and measure, research and gather comps, undertake valuation, draft report, report vetted, finalise and sign, report to client, issue invoice, ensure file in good order
What is turnover / gross profit / net profit?
Turnover is how much a business makes in sales during a period,
gross profit is the profit a company makes after deducting the costs associated with making and selling its products,
net profit is the profit a company makes after deducting the costs associated with making and selling its products and associated costs (tax)
What is a running yield?
A yield at a given point in time – passing rent over market value
What is a true yield?
Assumes rent is paid in advance
What is a nominal yield?
Assumes rent is paid in arrears
What is a net initial yield?
Passing rent over sale price and purchaser’s costs
What is a gross initial yield?
Passing rent over sale price
What is an equivalent yield?
A time-weighted average of the net initial yield and reversionary yield, representing the return a property will produce based upon the timing of the income received
What is an equated yield?
A yield in which growth is explicitly stated (as opposed to the others which are implicit)
What is a reversionary yield?
The yield that should be achieved if the passing rent adjusts to the level of the estimated rental value
What is an all risks yield?
A yield which factors in all the risks and prospects on a given income stream
What is forced sale value?
A special assumption. Condition of the value are ‘forced’ i.e. the timescale, cannot be used as a basis of valuation as it’s not a market value it reflects the conditions of the seller
What is a property that has a ‘clear title’?
The owner has no loan or question over their legal ownership, no other party can make a legal claim over ownership
If you are valuing an exemption from the red book? What do you do before commencing work.
Set out in the terms of engagement that the client understands and agrees to a non red book valuation.
